Knight Capital warns more losses could result from trading glitch

BloombergIn documents filed with securities regulators today, Knight warned it could sustain more losses if customers and trading partners lose confidence or if it faces lawsuits or regulatory probes as a result of an Aug. 1 trading error.

Knight Capital, the market maker that was driven to the verge of bankruptcy after a trading error, said last week’s mishap may cause more losses.
Should its customers and trading partners lose confidence, Knight’s reputation and business may suffer, the Jersey City-based firm said in a government filing. Lawsuits and regulatory probes may also cost money, it said.
“Just take it as the worst-case scenario where their lawyers told them put out the worst case,” said Bernard Donefer, a professor of information systems in financial markets at Baruch College, part of the City University of New York, and New York University’s Stern School of Business.
Knight Chief Executive Officer Thomas Joyce estimated the firm’s trading loss will be $270 million after taxes, according to a letter to clients, compared with a previously reported pretax loss of $440 million.
Knight was saved from collapse on Aug. 6, when it received a $400 million cash infusion through the sale of convertible securities to a consortium of investors.
The firm updated the “Risk Factors” listed in its annual report with today’s filing to include a discussion of the Aug. 1 trading error and the harm it caused to the confidence of customers and counterparties.
Joyce told clients in the letter that the company is in talks with outside advisers as it works to prevent another mishap.
Getco, Blackstone Group, brokerages Stifel Nicolaus & Co. and TD Ameritrade Holding Corp., as well as Stephen and Jefferies Group invested in the rescue funding for Knight. The investment will give the firms a 73 percent stake in Knight once the shares are converted into common stock.
“They shored up the short-term concerns,” Sang Lee, managing partner at Boston-based research firm Aite Group LLC, said in a telephone interview. “We’re well into the week and happy to say they’re still in business, but questions remain what is the long-term prospect.”